For investors in one of the hottest meme stocks of 2021, AMC Entertainment (NYSE:AMC) has become a key battleground stock for retail investors. Those looking to fight the good fight against the evil powers of the short-selling hedge fund have tapped AMC stock as a way to do so.
By driving up the price of AMC stock, social media-savvy retail investors are hoping to inflict pain on short-sellers betting on the eventual decline in AMC stock.
Indeed, it appears thus far that the retail mob is winning this battle.
AMC Stock Factors to Consider
For those still on the fence regarding whether to get into this stock, a number of key factors may come into play with such a decision.
First, investors would like to be reasonably assured retail buying will continue for some time. Given the fact the float of AMC just got a lot bigger, buying from retail investors will likely have to accelerate sharply to see some sort of February-like spike once again.
Second, investors will need to be reasonably confident that their retail investor compatriots will have “diamond hands” and hold onto their shares despite near-term stock price movements. Any sort of mass panic could cause a sharp reversal of this year’s incredible spike.
Lastly, investors will want to be confident that AMC won’t pull the rug out from underneath this trade. In other words, whether or not the company’s management team issues shares is likely a key determining factor of where AMC stock trades in the near-term.
Today, the market seems to be bullish on AMC stock on all three counts. Here’s more on why this stock is still above $10 per share, when the average analyst target price for this stock is below $5 per share, and as low as $1 per share right now.
Stock Is Showing Strength
On April 1, AMC stock dropped approximately 10% on news that the company was seeking shareholder approval to issue up to 500 million shares.
Of course, this sort of dilution is exactly what diamond-handed holders of AMC stock happen to be worried about right now. The sheer amount of retail buying that would be required to stop this stock from plunging would be unfathomable.
However, two weeks after this announcement, the company’s CEO assured investors that he won’t issue new shares during the 2021 calendar year, if shareholders approve the authorization. CEO Adam Aron said the following in a CNBC interview: “We hereby pledge at AMC that if the shareholders approve this authorization for 500 million new shares to be issued we will not use one of those 500 million shares in calendar year 2021. Not one. Not one.”
OK, that’s really good news for AMC shareholders.
Now, the question is what the company will do with its existing authorization. AMC currently is authorized to issue as many as 43 million shares. AMC’s CEO hasn’t dispelled the notion that these shares could indeed be issued this year “if we wish to raise some cash, if we decide that’s a good idea. We have made no decisions yet. We are thinking about it, but we haven’t made any decisions yet.”
Right now, AMC’s stock price is trading as if the retail army can absorb these 43 million shares, should they be issued.
Conclusion on AMC Stock
Since last summer, AMC has more than quadrupled its share count. The debt to equity conversion of Silver Lake’s convertible debt position resulted in more than 44 million shares issued earlier this year. The stock fell more than 36% on news of this issuance.
If the company were to issue the 43 million shares it’s authorized to issue right now, I think some sort of similar decline would be in order. AMC’s stock price is unsustainably high right now, and AMC’s management team knows this. I think they’re playing a game of chicken with the market right now, waiting for retail investors to bid the company’s stock higher before issuing shares.
I continue to be bearish on AMC in light of what I view as an unsustainably high share price and the high potential massive dilution will take hold at some point. Indeed, the Wall Street analysts covering AMC have put in the work, and I believe these analysts are spot on with an average target price of less than $5 per share.
I currently hold long-dated put options at $5 per share, which have begun to trade at very reasonable levels right now. Loop Capital’s $1 price target isn’t fantasy. It’s much closer to reality than AMC’s stock price of more than $10 per share today.
On the date of publication, Chris MacDonald held a SHORT position in AMC.
